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Pros and Cons of Incentives and Performance Measures

If a company wants to allocate Head Quarters administrative expenses to its consulting offices then what are the pros and cons for each of the following in terms of incentives, performance measures:

Allocating expenses based on:

1. Professional staff compensation
2. supplies and offices expenses
3. profit contribution of each office
4. fee revenues
5. profit contribution percent to fee revenue
6. total expenses at individual offices.

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Allocating expenses based on:

1. Professional staff compensation. If the head office administrative expenses are allocated on the basis of professional staff compensation, then it is correct way of allocating cost as the consulting offices with high salaries will have high amount of allocated costs and offices with low salaries will be allocated with less amount of allocated costs. Since the costs are allocated judiciously, performance measurement is also judicial. However, it is unfair to allocate the head office expenses on the basis of professional staff compensation because sometimes consulting offices with lower staff compensation might incur heavy operating expenses because of the inefficiency in the functioning of the offices. This is not taken into consideration if the head quarters expenses are allocated on the basis of professional staff compensation.

2. Supplies and offices expenses. Here, head quarters costs are allocated to consulting offices in proportion to supplies and office expenses incurred by each unit. The major advantage of this method is the office which is inefficient in controlling the supplies and office expenses costs will bear more costs and the office which is efficient in controlling the supplies and office expenses will be allocated less common costs. Therefore, efficiency is rewarded here. The major disadvantage of this method is that it does not take into account revenue aspect. ...

Solution Summary

The solution discusses the pros and cons for each of the following in terms of incentives and performance measures.

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